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Thursday, March 30, 2006

Being an attorney and having my own practice is very rewarding. I also know enough about the reputation of my profession to not take myself too seriously. Every once in a while, I will come across a story about another attorney that makes me scrach my head and say "Huh?".

I read a story this morning about an attorney from Northern California that is suing the Internet dating website eHarmony for discrimination. It turns out that attorney John Claassen of Emeryville, CA is still married. Although he is separated and his divorce will be final in two months. Mr. Claassen believes that eHarmony should allow him to use its dating service now. Mr. Claassen filed a lawsuit in Alameda County Superior Court requesting $12,000 in damages.

While I fully support California laws that prohibit businesses from engaging in arbitrary discrimination, this lawsuit patently absurd. According to a company spokesperson, surveys of eHarmony customers reveal that the vast majority of them prefer their matches to be divorced, widowed or never married at all. Instead of waiting for his divorce to be finalized or using another Internet dating service, Mr. Claassen chose to file a lawsuit. This course of action seems more like publicity stunt not unlike the San Francisco attorney who filed a lawsuit in 2003 to ban Oreo cookies.

According to the California State Bar, Mr. Claassen has only been in practice since May 2001. I just hope he reconsiders his course of action before doing too much more damage to his professional reputation.

Monday, March 27, 2006

Some people will do just about anything to lower their income tax bill, which means they could be victims of a variety of tax scams.

Nobody is ever eager to pay income taxes and the con-men know this. The BBB is advising consumers not to be fooled by outrageous claims when someone says there are secret ways to escape paying taxes. Instead of limiting your tax liability, tax scams will only separate you from even more of your hard-earned cash.

Among the typical tax scams:

"Instant" or "rapid" tax refunds could be actually short-term, cash-advance loans with a high interest rate;

Unscrupulous tax return preparers will fabricate expenses on their client's return and then charge an inflated fee after "guaranteeing" a larger refund;

Fast-talking promoters looking for a big commission will urge taxpayers to transfer assets into trust accounts, out-of-state corporations or overseas bank accounts in the Bahamas, which may not deliver the tax reduction benefits as advertised;

Starting a phony church or a bogus home-based business, or claiming tax credits for Civil War slave reparations or Americans with Disabilities Act entitlements -- in order to absolve yourself of taxes, child support and other debts -- is likely to draw the swift attention from the Internal Revenue Service;

Identity thieves posing as IRS agents will lie about depositing big refunds in exchange for personal information, such as bank account, Social Security and credit-card numbers.

The BBB advises consumers to carefully choose a tax preparer. No matter who prepares a return, the taxpayer is ultimately responsible for all the information on that return, along with any resulting back taxes, interest and penalties as a result of tax evading schemes.

Sunday, March 26, 2006

There were surprisingly few new employment laws becoming effective on or before January 1, 2006. However, some of the laws that were enacted which employers need to be aware of are discussed below.

Termination Paycheck: Labor Code § 213 now allows to pay final wages by direct deposit if the employee already received his or her paycheck in that manner. This can be helpful if the former employee refuses to participate in an exit interview or to avoid other confrontations. The employer still must abide by existing regulations to pay final wages in a timely fashion.

Overtime for Computer Software Employees: Labor Code § 515.5 changes the over-time exemption for employees in the computer software field. Previously, an employee "in the computer software field" was considered exempt from over-time requirements if certain conditions were met, including the payment of not less than $41.00 per hour. The exemption is also met if the employee receives an annualized full-time salary equivalent to that hourly rate.

Paychecks: Beginning July 21, 2005, Labor Code § 226 changes the information that must be disclosed on an employee's paycheck. The law previously required employers to provided employees with an accurate itemized paycheck that included, among other things, the employeeÂs name and social security number. Due to identify theft concerns, the Legislature added section 226 to prevent inclusion of an employeeÂs social security number on paychecks and required that, by no later than January 2008, employers include on an itemized wage statement no more than the last four digits of the employeeÂs social security number or an existing employee identification number. The 2005 amendment clarified that the identification number must not be the employeeÂs social security number.

Marital Status and Sexual Orientation Protected by The Unruh Act: Assembly Bill 1400 amended the Unruh Civil Rights Act to clarify that discrimination based upon marital status and sexual orientation is also precluded by this Act.

Hate Crime Statute of Limitations: Civil Code § 52 and California Code of Civil Procedure § 338 were amended to extend the statute of limitations for civil actions based on hate crimes from one year to three years. Although this new law does not directly apply to employment claims, it will affect California businesses as it is part of The Civil Rights Act of 2005.

Monday, March 13, 2006

Most limited liability companies ("LLCs") in California are treated as partnerships for federal and California income tax purposes, and therefore are exempt from federal and California income taxes. The income taxed taxed on the returns of the "members" of the LLC. However, any LLC that is organized, registered, or doing business in California generally is required to pay an $800 annual franchise tax as well as an additional fee based upon the LLC's total income. The fee can be as high as $11,790 for an LLC with total income of $5,000,000 or more, and is zero for LLCs with total income below $250,000.

In recent case called Northwest Energetic Services v. California Franchise Tax Board, a Superior Court judge in San Francisco ruled that this additional fee violates the United States Constitution because it is based upon an LLC's total income, rather than solely upon that portion of the LLC's income that is fairly apportioned to California. As a result, LLCs may not be required to pay the Annual Fee and may be eligible for refunds of amounts paid in prior years. Click here to read a copy of the judge's ruling.

The facts in were somewhat unusual because LLC was registered to do business in California, but did not actually have any operations or conduct any business within the state. The court did not address the constitutionally of the fee imposed on LLCs that do have California business or operations. It is possible that the courts would deem this additional fee unconstitutional in its entirety. The more likely result, however, is that the courts would hold that the additinal fee partially constitutional to the extent that LLCs may be required to pay a portion of the fee upon the percentage of their business and operations within California. It is even possible that the original holding will be overturned on appeal.

Moving forward, it would not appear difficult for California to revise the fee so that it satisfies constitutional requirements. By incorporating an appropriate apportionment mechanism (such as already exists for other California taxes), and adjusting the overall fee rate, California could maintain the same level of revenue that it historically received from this fee.

Thus, the precise impact of this case will remain unclear while the case is on appeal. LLCs that are or have been organized, registered, or doing business in California must consider whether to pay the fee and whether to apply for a refund of Annual Fees paid in prior years. For some LLCs, the amount of the Annual Fee is small relative to the costs of seeking a refund. On the other hand, the potential refund could be quite large. LLCs may be entitled to refunds only for "open" tax years, which potentially means that the decision to seek a refund for the most distant open years must be made quickly. Thus, each LLC should promptly consult with its tax advisor to determine the most appropriate course of action.

Saturday, March 11, 2006

WASHINGTON — The Internal Revenue Service today issued the 2006 “Dirty Dozen”––its latest annual tally of some of the most notorious tax scams––along with an alert to taxpayers this filing season to watch out for schemes that promise to reduce or eliminate taxes.

Two new schemes have worked their way onto the list in 2006. In recent months IRS personnel have noted the emergence of the two scams––“zero wages” and “Form 843 tax abatement”–– in which filers use IRS forms to claim that their tax bills have been wrongly inflated.

Also high on the list in 2006 is “phishing,” a favorite ploy of identity thieves. Over the past few years, the IRS has observed criminals working through the Internet, posing even as representatives of the IRS itself, with the goal of tricking unsuspecting taxpayers into revealing private information that can be used to steal from their financial accounts.

Several of the usual suspects from last year remain on the list. The IRS, for example, continues to see schemes designed to exploit charitable organizations. Some taxpayers, meanwhile, still use frivolous arguments to claim they do not owe taxes, despite the fact such reasoning has been thrown out of court time and again.

“When it comes to taxes, everyone has to pay their fair share,” IRS Commissioner Mark W. Everson said. “I urge taxpayers not to be taken in by hucksters who promise to lower or eliminate taxes. Getting caught up in the Dirty Dozen or similar schemes can lead to big headaches.”

Namely, involvement with tax schemes can lead to imprisonment and fines. The IRS pursues and shuts down promoters of these and numerous other scams. Anyone pulled into these schemes can also face repayment of taxes plus interest and penalties.

The IRS urges people to avoid these common schemes:

1. Zero Wages. In this scam, new to the Dirty Dozen, a taxpayer attaches to his or her return either a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 that shows zero or little wages or other income. The taxpayer may include a statement indicating the taxpayer is rebutting information submitted to the IRS by the payer.An explanation on the Form 4852 may cite "statutory language behind IRC 3401 and 3121" or may include some reference to the paying company refusing to issue a corrected Form W-2 for fear of IRS retaliation. The Form 4852 or 1099 is usually attached to a “Zero Return.” (See number four below.)

2. Form 843 Tax Abatement. This scam, also new to the Dirty Dozen, rests on faulty interpretation of the Internal Revenue Code. It involves the filer requesting abatement of previously assessed tax using Form 843. Many using this scam have not previously filed tax returns and the tax they are trying to have abated has been assessed by the IRS through the Substitute for Return Program. The filer uses the Form 843 to list reasons for the request. Often, one of the reasons is: "Failed to properly compute and/or calculate IRC Sec 83––Property Transferred in Connection with Performance of Service."

3. Phishing. Phishing is a technique used by identity thieves to acquire personal financial data in order to gain access to the financial accounts of unsuspecting consumers, run up charges on their credit cards or apply for new loans in their names. These Internet-based criminals pose as representatives of a financial institution and send out fictitious e-mail correspondence in an attempt to trick consumers into disclosing private information. Sometimes scammers pose as the IRS itself. In recent months, some taxpayers have received e-mails that appear to come from the IRS. A typical e-mail notifies a taxpayer of an outstanding refund and urges the taxpayer to click on a hyperlink and visit an official-looking Web site. The Web site then solicits a social security and credit card number. In a variation of this scheme, criminals have used e-mail to announce to unsuspecting taxpayers they are “under audit” and could make things right by divulging selected private financial information. Taxpayers should take note: The IRS does not use e-mail to initiate contact with taxpayers about issues related to their accounts. If a taxpayer has any doubt whether a contact from the IRS is authentic, the taxpayer should call 1-800-829-1040 to confirm it.

4. Zero Return. Promoters instruct taxpayers to enter all zeros on their federal income tax filings. In a twist on this scheme, filers enter zero income, report their withholding and then write “nunc pro tunc”–– Latin for “now for then”––on the return. They often also do this with amended returns in the hope the IRS will disregard the original return in which they reported wages and other income.

5. Trust Misuse. For years unscrupulous promoters have urged taxpayers to transfer assets into trusts. They promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. However, some trusts do not deliver the promised tax benefits, and the IRS is actively examining these arrangements. There are currently more than 200 active investigations underway and three dozen injunctions have been obtained against promoters since 2001. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering into a trust.

6. Frivolous Arguments. Promoters have been known to make the following outlandish claims: the Sixteenth Amendment concerning congressional power to lay and collect income taxes was never ratified; wages are not income; filing a return and paying taxes are merely voluntary; and being required to file Form 1040 violates the Fifth Amendment right against self-incrimination or the Fourth Amendment right to privacy. Don’t believe these or other similar claims. These arguments are false and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law.

7. Return Preparer Fraud. Dishonest return preparers can cause many headaches for taxpayers who fall victim to their schemes. Such preparers derive financial gain by skimming a portion of their clients’ refunds and charging inflated fees for return preparation services. They attract new clients by promising large refunds. Taxpayers should choose carefully when hiring a tax preparer. As the old saying goes, “If it sounds too good to be true, it probably is.” And remember, no matter who prepares the return, the taxpayer is ultimately responsible for its accuracy. Since 2002, the courts have issued injunctions ordering dozens of individuals to cease preparing returns, and the Department of Justice has filed complaints against dozens of others. During fiscal year 2005, more than 110 tax return preparers were convicted of tax crimes.

8. Credit Counseling Agencies. Taxpayers should be careful with credit counseling organizations that claim they can fix credit ratings, push debt payment plans or impose high set-up fees or monthly service charges that may add to existing debt. The IRS Tax Exempt and Government Entities Division is in the process of revoking the tax-exempt status of numerous credit counseling organizations that operated under the guise of educating financially distressed consumers with debt problems while charging debtors large fees and providing little or no counseling.

9. Abuse of Charitable Organizations and Deductions. The IRS has observed increased use of tax-exempt organizations to improperly shield income or assets from taxation. This can occur, for example, when a taxpayer moves assets or income to a tax-exempt supporting organization or donor-advised fund but maintains control over the assets or income, thereby obtaining a tax deduction without transferring a commensurate benefit to charity. A “contribution” of a historic facade easement to a tax-exempt conservation organization is another example. In many cases, local historic preservation laws already prohibit alteration of the home’s facade, making the contributed easement superfluous. Even if the facade could be altered, the deduction claimed for the easement contribution may far exceed the easement’s impact on the value of the property.

10. Offshore Transactions. Despite a crackdown by the IRS and state tax agencies, individuals continue to try to avoid U.S. taxes by illegally hiding income in offshore bank and brokerage accounts or using offshore credit cards, wire transfers, foreign trusts, employee leasing schemes, private annuities or life insurance to do so. The IRS and the tax agencies of U.S. states and possessions continue to aggressively pursue taxpayers and promoters involved in such abusive transactions. During fiscal 2005, 68 individuals were convicted on charges of promotion and use of abusive tax schemes designed to evade taxes.

11. Employment Tax Evasion. The IRS has seen a number of illegal schemes that instruct employers not to withhold federal income tax or other employment taxes from wages paid to their employees. Such advice is based on an incorrect interpretation of Section 861 and other parts of the tax law and has been refuted in court. Lately, the IRS has seen an increase in activity in the area of “double-dip” parking and medical reimbursement issues. In recent years, the courts have issued injunctions against more than a dozen persons ordering them to stop promoting the scheme. During fiscal 2005, more than 50 individuals were sentenced to an average of 30 months in prison for employment tax evasion. Employer participants can also be held responsible for back payments of employment taxes, plus penalties and interest. It is worth noting that employees who have nothing withheld from their wages are still responsible for payment of their personal taxes.

12. “No Gain” Deduction. Filers attempt to eliminate their entire adjusted gross income (AGI) by deducting it on Schedule A. The filer lists his or her AGI under the Schedule A section labeled “Other Miscellaneous Deductions” and attaches a statement to the return that refers to court documents and includes the words “No Gain Realized.”

Two Fall off the List

Two noteworthy scams have dropped off the “Dirty Dozen” this year: “claim of right” and “corporation sole.” IRS personnel have noticed less activity in these scams over the past year following court cases against a number of promoters.

How to Report Suspected Tax Fraud Activity

Suspected tax fraud can be reported to the IRS using IRS Form 3949-A, Information Referral. Form 3949-A is available for download from the IRS Web site at IRS.gov, or through the U.S. Mail by calling 1-800-829-3676. The completed form or a letter detailing the alleged fraudulent activity should be addressed to the Internal Revenue Service, Fresno, CA 93888. The mailing should include specific information about who is being reported, the activity being reported, how the activity became known, when the alleged violation took place, the amount of money involved and any other information that might be helpful in an investigation. The person filing the report is not required to self-identify, although it is helpful to do so. The identity of the person filing the report can be kept confidential. The person may also be entitled to a reward.

People in disputes who are considering using mediation as a way to resolve their differences often want to know what the process offers. While mediation can not guarantee specific results, there are trends that are characteristic of mediation. Below is a list of some of the benefits of mediation, broadly considered. Mediation generally produces or promotes:

Economical DecisionsMediation is generally less expensive when contrasted to the expense of litigation or other forms of fighting.

Rapid SettlementsIn an era when it may take as long as a year to get a court date, and multiple years if a case is appealed, the mediation alternative often provides a more timely way of resolving disputes. When parties want to get on with business or their lives, mediation may be desirable as a means of producing rapid results.

Mutually Satisfactory OutcomesParties are generally more satisfied with solutions that have been mutually agreed upon, as opposed to solutions that are imposed by a third party decision-maker.

High Rate of ComplianceParties who have reached their own agreement in mediation are also generally more likely to follow through and comply with its terms than those whose resolution has been imposed by a third party decision-maker.Comprehensive and Customized AgreementsMediated settlements are able to address both legal and extra-legal issues. Mediated agreements often cover procedural and psychological issues that are not necessarily susceptible to legal determination. The parties can tailor their settlement to their particular situation.

Greater Degree of Control and Predictability of OutcomeParties who negotiate their own settlements have more control over the outcome of their dispute. Gains and losses are more predictable in a mediated settlement than they would be if a case is arbitrated or adjudicated.

Personal Empowerment People who negotiate their own settlements often feel more powerful than those who use surrogate advocates, such as lawyers, to represent them. Mediation negotiations can provide a forum for learning about and exercising personal power or influence.

Preservation of an Ongoing Relationship or Termination of a Relationship in a More Amicable WayMany disputes occur in the context of relationships that will continue over future years. A mediated settlement that addresses all parties' interests can often preserve a working relationship in ways that would not be possible in a win/lose decision-making procedure. Mediation can also make the termination of a relationship more amicable.

Workable and Implementable DecisionsParties who mediate their differences are able to attend to the fine details of implementation. Negotiated or mediated agreements can include specially tailored procedures for how the decisions will be carried out. This fact often enhances the likelihood that parties will actually comply with the terms of the settlement.

Agreements that are Better than Simple Compromises or Win/Lose OutcomesInterest-based mediated negotiations can result in settlements that are more satisfactory to all parties than simple compromise decisions.

Decisions that Hold Up Over TimeMediated settlements tend to hold up over time, and if a later dispute results, the parties are more likely to utilize a cooperative forum of problem-solving to resolve their differences than to pursue an adversarial approach.